Hw7 - homework PDF

Preview

Summary

homework...

Description

Homework 7 Multiple Choice Identify the choice that best completes the statement or answers the question. ____

____

____

____

____

1. The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? A. $935.82 B. $941.51 C. $958.15 D. $964.41 E. $979.53 2. Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell? A. $801.80 B. $814.74 C. $828.81 D. $830.53 E. $847.86 3. Brown Enterprises' bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity? A. 6.87% B. 7.03% C. 7.21% D. 7.45% E. 7.61% 4. Bauer Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to maturity (YTM)? A. 8.78% B. 8.99% C. 9.15% D. 9.33% E. 9.41% 5. Highfield Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to call (YTC)? A. 7.00% B. 7.13% C. 7.28% D. 7.31% E. 7.42%

1

____

____

____

____

____

____

6. Brown Enterprises' bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their current yield? A. 7.80% B. 7.90% C. 9.00% D. 9.10% E. 9.20% 7. Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? A. $1,046.59 B. $1,111.58 C. $1,133.40 D. $1,177.78 E. $1,189.04 8. Yest Corporation's bonds have a 15-year maturity, a 7% semiannual coupon, and a par value of $1,000. The going interest rate (r d) is 6%, based on semiannual compounding. What is the bond's price? A. $1,008.65 B. $1,024.67 C. $1,051.34 D. $1,098.00 E. $1,105.78 9. A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now? A. $933.09 B. $941.86 C. $951.87 D. $965.84 E. $978.40 10. Moussawi Ltd's outstanding bonds have a $1,000 par value, and they mature in 5 years. Their yield to maturity is 9%, based on semiannual compounding, and the current market price is $853.61. What is the bond's annual coupon interest rate? A. 5.10% B. 5.20% C. 5.30% D. 5.40% E. 5.50% 11. Walker Industries has a bond outstanding with 12 years to maturity, a 9% coupon paid semiannually, and a $1,000 par value. The bond has a 7% nominal yield to maturity, but it can be called in 3 years at a price of $1,045. What is the bond's nominal yield to call? A. 4.43% B. 4.62% C. 4.82% D. 4.91% E. 4.99%

2

____ 12. Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1%? A. 20-year, zero coupon bond. B. 10-year, zero coupon bond. C. 20-year, 10% coupon bond. D. 20-year, 5% coupon bond. E. 1-year, 10% coupon bond. ____ 13. If the yield to maturity decreased 1%, which of the following bonds would have the largest percentage increase in value? A. A 10-year zero coupon bond. B. A 1-year zero coupon bond. C. A 1-year bond with an 8% coupon. D. A 10-year bond with an 8% coupon. E. A 10-year bond with a 12% coupon. ____ 14. Which of the following statements is CORRECT? A. A bond is likely to be called if it sells at a discount below par. B. A bond is likely to be called if its coupon rate is below its YTM. C. A bond is likely to be called if its market price is equal to its par value. D. A bond is likely to be called if its market price is below its par value. E. Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be harmed if the bond is called. ____ 15. A bond that matures in 12 years has a 9% semiannual coupon and a face value of $1,000. The bond has a nominal yield to maturity of 8%. What is the price of the bond today? A. $ 927.52 B. $ 928.39 C. $1,073.99 D. $1,075.36 E. $1,076.23 ____ 16. Due to numerous lawsuits, a major chemical manufacturer has recently experienced a market reevaluation. The firm has 15-year, 8% semiannual coupon bonds. The required nominal rate on this debt has now risen to 16%. What is the current value of this bond? A. $1,273 B. $1,000 C. $7,783 D. $ 550 E. $ 450 ____ 17. A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal yield to maturity is 12% with quarterly compounding, how much should you be willing to pay for this bond? A. $ 941.36 B. $1,051.25 C. $1,115.57 D. $1,391.00 E. $ 825.49

3

____ 18. A 10-year, $1,000 face value bond has an 8.5% annual coupon. The bond has a current yield of 8%. What is the bond's yield to maturity? A. 8.25% B. 8.86% C. 7.59% D. 8.50% E. 8.00% ____ 19. A $1,000 face value corporate bond pays a $50 coupon every six months. The bond matures in 12 years and sells at a price of $1,080. What is the bond's nominal yield to maturity? A. 8.28% B. 8.65% C. 8.90% D. 9.31% E. 10.78% ____ 20. You just purchased a $1,000 par value, 9-year, 7% semiannual coupon bond. The bond sells for $920. What is the nominal yield to maturity? A. 7.28% B. 8.28% C. 9.60% D. 8.67% E. 4.13% ____ 21. A 14-year, $1,000 face value corporate bond has an 8% semiannual coupon and sells for $1,075. The bond may be called in five years at a call price of $1,050. What are the bond's yields to maturity and call? A. YTM 14.29%; YTC 14.09% B. YTM 3.57%; YTC 3.52% C. YTM 7.14%; YTC 7.34% D. YTM 6.64%; YTC 4.78% E. YTM 7.14%; YTC 7.05% ____ 22. Cold Boxes Ltd. has 100 bonds outstanding (maturity value $1,000). Their nominal required yield to maturity is 10%, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate? A. 8% B. 6% C. 4% D. 2% E. 0% ____ 23. A 12-year, 8.5% annual coupon bond has a yield to maturity of 9.5% and a par value of $1,000. What is the bond's current yield? A. 6.36% B. 2.15% C. 8.95% D. 9.14% E. 10.21%

4

____ 24. A 6-year bond, 8% semiannual coupon bond sells at par ($1,000). Another bond of equal risk, maturity, and par value pays an 8% annual coupon. What is the price of the annual coupon bond? A. $689.08 B. $712.05 C. $980.43 D. $986.72 E. $992.64 ____ 25. A 10-year, $1,000 face value bond has an 8% annual coupon and a yield to maturity of 10%. If market interest rates remain at 10%, what will be the bond's price two years from today? A. $ 877.11 B. $ 893.30 C. $1,061.30 D. $ 912.55 E. $1,023.06 ____ 26. A 16-year, $1,000 face value bond with a 10% annual coupon has a current yield of 8%. What is the bond's yield to maturity (YTM)? A. 6.9% B. 7.1% C. 7.3% D. 7.5% E. 7.7% ____ 27. A 15-year, $1,000 face value bond with a 10% semiannual coupon has a nominal yield to maturity of 7.5%. The bond, which may be called after five years, has a nominal yield to call of 5.54%. What is the bond's call price? A. $ 564 B. $1,110 C. $1,100 D. $1,173 E. $1,040 ____ 28. Kennedy Gas Works has 10-year, $1,000 face value bonds that pay a 10% quarterly coupon. The bonds may be called in five years. The bonds have a nominal yield to maturity of 8% and a yield to call of 7.5%. What is the bonds' call price? A. $ 379.27 B. $1,025.00 C. $1,048.34 D. $1,036.77 E. $1,136.78 ____ 29. A 12-year, $1,000 face value bond pays a 9% annual coupon and has a yield to maturity of 7.5%. The bond can first be called four years from now, at a call price of $1,050. What is the bond's yield to call? A. 6.73% B. 7.10% C. 7.50% D. 11.86% E. 13.45%

5

____ 30. A 12-year, $1,000 face value bond pays a 9% semiannual coupon. The bond has a nominal yield to maturity of 7.5%, and it can be called in 4 years at a call price of $1,045. What is the bond's nominal yield to call? A. 6.61% B. 11.36% C. 3.31% D. 9.98% E. 5.68% ____ 31. A 10-year, $1,000 face value bond sells for $1,075. The bond has a 9% semiannual coupon and is callable in 5 years and a call price is $1,035. What is the bond's nominal yield to call? A. 7.19% B. 7.75% C. 7.90% D. 8.00% E. 8.13% ____ 32. Meade Corporation has 6-year, $1,000 par value bonds that have a yield to maturity of 8.5% and a 10% semiannual coupon rate. What are the current and capital gains yields on the bonds for this year? A. Current yield 8.50%; capital gains yield 1.50% B. Current yield 9.35%; capital gains yield 0.65% C. Current yield 9.36%; capital gains yield -0.86% D. Current yield 10.00%; capital gains yield 0.00% E. Current yield 10.50%; capital gains yield -1.50%

6

ID: A

Homework 7 Answer Section MULTIPLE CHOICE 1. ANS: A

TOP: Bond valuation 2. ANS: C

TOP: Bond valuation 3. ANS: E

TOP: Yield to maturity 4. ANS: B

TOP: Current yield 5. ANS: D

TOP: Yield to call

1

ID: A 6. ANS: A

TOP: Current yield 7. ANS: B

TOP: Bond valuation 8. ANS: D

TOP: Bond valuation--semiannual coupons 9. ANS: A

TOP: Bond value in future time periods

2

ID: A 10. ANS: C

TOP: Determining the coupon rate 11. ANS: B

TOP: Yields to maturity and call 12. ANS: A Statement a is correct, because the longer the maturity of a bond and the lower the coupon rate, the more sensitive its price is to a change in interest rates. For this reason, the remaining statements are incorrect. TOP: Interest rate price risk 13. ANS: A Statement a is correct, because the 10-year zero has the longest maturity and pays the lowest coupon. TOP: Price risk 14. ANS: E TOP: Call provision 15. ANS: E This is a straight-forward bond valuation; just remember that the bond has semiannual coupons. Enter the following data into your financial calculator: N 12 2 24; I/YR 8 2 4; PMT 90 2 45; FV 1000; and then solve for PV -$1,076.23. VB $1,076.23. TOP: Bond value--semiannual payment

3

ID: A 16. ANS: D

Financial calculator solution: Inputs: N 30; I/YR 8; PMT 40; FV 1000. Output: PV -$549.69; VB $549.69 $550. TOP: Bond value--semiannual payment 17. ANS: C

Financial calculator solution: N 40; I/YR 3; PMT 35; FV 1000. Inputs: Output: PV -$1,115.57; VB $1,115.57. TOP: Bond value--quarterly payment 18. ANS: C Data given: N 10; I/YR ? (This is what the problem is looking for); PMT directly, but you can calculate it from the current yield); FV 1,000.

85; PV

? (Don't have

Step 1:

Calculate the bond's current price from information given in the current yield. Current yield Coupon/Price 0.08 $85/Price Price ? $1,062.50.

Step 2:

Given the bond's price, calculate the bond's yield to maturity using your financial calculator by entering the following data as inputs: N 10; PV -1062.50; PMT 85; FV 1000; and then solve for I/YR 7.5859% ˜ 7.59%.

TOP: Yield to maturity 19. ANS: C N 12 2 24; PV -1080; PMT

50; FV

1000; and then solve for I/YR

TOP: Yield to maturity--semiannual bond

4

4.4508%

2

8.9016%.

ID: A 20. ANS: B Enter the following input data in the calculator: N 18; PV -920; PMT 35; FV 1000; and then solve for I/YR 4.1391%. Convert this semiannual periodic rate to a nominal annual rate, 4.1391% 2 8.2782% 8.28%. TOP: Yield to maturity--semiannual bond 21. ANS: E To calculate YTM: N 28; PV -1075; PMT 40; FV 1000; and then solve for I/YR To calculate YTC: N 10; PV -1075; PMT

40; FV

1050; and then solve for I/YR

3.57%

2

7.14%.

3.52%

2

7.05%.

TOP: YTM and YTC--semiannual bond 22. ANS: C

Financial calculator solution: Inputs: N 10; I/YR 5; PV -768; FV 1000. Output: PMT $19.955 (semiannual PMT). Annual coupon rate

(PMT

2)/M

($19.955

2)/$1,000

3.99%

4%.

TOP: Bond coupon rate 23. ANS: D Current yield Annual coupon payment/Current price. Step 1:

Step 2:

Find the price of the bond: N 12; I/YR 9.5; PMT 85; FV 1000; and then solve for PV $930. Calculate the current yield: CY

$85/$930

-$930. VB

9.14%.

TOP: Current yield 24. ANS: E The semiannual bond selling at par has a nominal yield to maturity equal to its annual coupon rate (you can check this). Thus the nominal YTM for the semiannual bond is 8%. To convert this to an effective annual rate for the annual bond: NOM% 8; P/YR 2; and then solve for EFF% 8.16%. We can now value the annual bond using this rate, as the nominal rate is the same as the effective rate when compounding occurs annually. Thus; N 6; I/YR 8.16; PMT 80; FV 1000; and then solve for PV -$992.64. VB $992.64. TOP: Bond value--annual and semiannual payment

5

ID: A 25. ANS: B Two years from now, there will be 8 years left to maturity. Use your financial calculator to determine its price by entering the following data as inputs: N

8; I/YR

10; PMT

80; FV

1000; and then solve for PV

-$893.30. VB

$893.30.

TOP: Future bond value--annual payment 26. ANS: C Step 1: Calculate the price of the 16-year bond: Current yield Coupon/Price 8% $100/Price Price $100/0.08 $1,250.00. This assumes a $1,000 face value. It doesn't matter what face value you select as long as you are consistent throughout your calculations. Step 2:

Calculate the 16-year bond's YTM: Enter the following input data in the calculator: N 16; PV -1250; PMT 100; FV 1000; and solve for I/YR

TOP: Current yield and YTM 27. ANS: E Step 1: Find the bond price using the YTM: Enter the following input data in the calculator: N 30; I/YR 7.5/2 3.75; PMT 0.10/2 1,000 for PV -$1,222.87. VB $1,222.87. Step 2:

50; FV

7.3%.

1000; and then solve

Solve for the call price: Enter the following input data in the calculator: N 10; I/YR 5.54/2 2.77; PV -1222.87; PMT 50; and then solve for FV $1,039.938 ˜ $1,040.

TOP: Call price--semiannual payment 28. ANS: C First, solve for the bond price today as follows: N 10 4 1000; and then solve for PV -$1,136.78. VB $1,136.78. Now, the call price can be solved for as follows: N 25; and then solve for FV $1,048.34. TOP: Call price--quarterly payment

6

5

4

40; I/YR

8/4

20; I/YR

7.5/4

2; PMT

100/4

1.875; PV

25; FV

-1136.78; PMT

ID: A 29. ANS: A First get the price based on the YTM: N 12; I/YR 7.5; PMT 90; FV 1000; and then solve for PV Now solve for the YTC: N 4; PV -1116.03; PMT

90; FV

-$1,116.03. VB

1050; and then solve for I/YR

$1,116.03.

6.73%.

TOP: Yield to call--annual bond 30. ANS: A Step 1: Find the price of the semiannual bond today using the YTM and other information given: N 12 2 24; I/YR 7.5/2 3.75; PMT 45; FV 1000; and then solve for PV -$1,117.3362. VB $1,117.3362. Step 2:

Given the bond's price, calculate the yield to call by entering the following data as inputs: N 4 2 8; PV -1117.3362; PMT 45; FV 1045; and then solve for I/YR r/2 3.3073% per 6 months I/YR r/2 3.3073% per 6 months r 3.3073% 2 6.6146% 6.61%.

TOP: Yield to call-semiannual bond 31. ANS: B Enter the following data as inputs in your calculator: N 2 5 10; PV -1075; PMT 0.09/2 1,000 45; FV 3.8743%.

1035; and then solve for I/YR

Since this is a 6-month rate, just multiply by 2 to solve for the nominal yield to call. I/YR 7.7486%

rd

rd/2

2

3.8743%

7.75%.

TOP: Yield to call--semiannual bond 32. ANS: C First, calculate the bond price as follows: N for PV VB -$1,068.3038.

6; I/YR

8.5; PMT

0.10

1,000

The current yield (CY) is then $100/$1,068.3038 9.36%. Recognizing that CY in the following equation 9.36% + CG 8.5%, CG -0.86%. TOP: Current yield and capital gains yield

7

50; FV

CG

1000; and solve

YTM, solve for CG...